The figure below reflects the inverse relationship between the inflation rate and the unemployment rate. The figure shows that the natural rate of unemployment is:

A) 2 percent.
B) 1 percent.
C) 4 percent.
D) 8 percent.
E) 10 percent.

Question

The figure below reflects the inverse relationship between the inflation rate and the unemployment rate. The figure shows that the natural rate of unemployment is:

A) 2 percent. 
B) 1 percent. 
C) 4 percent. 
D) 8 percent. 
E) 10 percent.

Quizplus · Accepted Answer

The natural rate of unemployment is the unemployment rate that corresponds to potential GDP. From the figure, we can see that at a 0 percent inflation rate, the unemployment rate is approximately 4 percent, which is the lowest point on the Phillips curve. Therefore, the natural rate of unemployment is 4 percent.

The Figure Below Reflects the Inverse Relationship Between the Inflation